Reverse Takeover

A reverse takeover or merger occurs when investors of a private held company acquires a majority of the shares of a publicly traded company with substantial business operations, though often with a series of losses or with a publicly traded “shell” company with no assets or liabilities just an organizational structure and shareholders. Therefore, it usually requires a recapitalization of the acquiring company to eventually make the transaction viable to the buyer though in most cases an increase in capital requirements are not necessary in the short term. The major advantages of the reverse takeover is that the process of going private to public is conducted without the acquiring company having to go through the traditional route of undertaking a lengthy and expensive initial public offering as well as providing the vehicle so that a private company can go public without raising capital, which greatly simplifies the process. This is accomplished by the shareholders of the private company selling all their shares in exchange for shares of the public company. The newly merged company typically takes on the name of the private company, installs the private company’s directors and officers, and files with the appropriate regulatory authorities, thus completing the transaction. There are also considerable tax benefits that the public company can offer to the acquiring private company such as protecting a percentage of the merged company’s profits from future taxes if losses have occurred in the past for the acquired public company.

To be successful in reverse takeovers the ownership of a privately held company must first be constantly on the lookout for publicly traded companies that fit the right description and profile of a reverse takeover candidate. Public companies that have considerable cash on hand though are trying to raise capital of under a million dollars; with $50 million in sales are typically prime targets. Second, the acquiring company must have the acumen of the business turnaround, and specifically the organizational and financial skills to merge two separate entities into one. Third, both companies should be complimentary in the product or services they provide and have synergistic qualities. Because targets are publicly traded, signals of reverse takeover candidates may be found in the financial media or in industry or trade journals.

To Summit a successful reverse takeover or merger is a specific targeted merger candidate that fits within the acquiring company’s strategic plan. If the desire to go public is because public companies have higher valuations, faster growth rates, greater liquidity, and increased publicity, a reversed takeover might seem attractive. However, none of the objectives above is about strategy. In fact, they are anti-strategy. The disadvantages of sloppy due diligence by the buyer and poor historical documentation by the seller, unseen reverse stock splits by the buyer, a growing impatience with going public by the buyer, and the new directors having no knowledge of running a publicly traded company will completely overshadow any perceived advantages. Going public should be the vehicle of corporate strategy not the end result. Summit’s clients realize that strategy comes first, careful market searches is second, complete and detailed due diligence is third, arranging a satisfactory deal structure comes forth, executing the merger and going public is fifth, and strategically integrating the two former entities through restructuring is last. Though the process from start to finish is a shorter timeframe than an initial public offering, a reverse takeover is still a time-consuming ordeal. Though if accomplished correctly and in an orderly fashion can be tremendously rewarding.